Musings: It's Official - Oil Industry Enters The New Era Of Austerity
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Last week, Chevron (CVX-NYSE), the second largest oil company, held its annual analyst meeting at which time the company’s management laid out its plans for the next five years, including projections for capital spending and oil and gas production growth. The meeting followed on a presentation at the IHS CERA Week conference in Houston by Chevron CEO John Watson in which he proclaimed that today’s $100 a barrel oil is the equivalent of the past’s $20 a barrel oil. By that he meant that the oil industry must now figure its budget outlooks based on the need for oil prices to stay around the $100 a barrel level in order for the company to generate the necessary cash flow to support spending plans and for projects to offer future returns to meet or exceed required investment hurdles. Mr. Watson has talked about the impact on his business of rapidly escalating costs for finding and developing new oil reserves, which is why he says the company now needs that $100 a barrel price. Chevron is the latest major oil company to implicitly declare that the oil industry has entered a new era – one marked by higher costs and more disciplined capital investment programs that will require higher oil prices. Capital discipline forces companies to sacrifice production growth targets on the altar of increased profitability in order to boost returns to shareholders. What does this new era mean for the oil and gas business? Equally important, what does it mean for energy markets?
Chevron now projects it will produce 3.1 million barrels a day of oil equivalent (boe/d) in 2017, down from a target of 3.3 million boe/d that the company established in 2010 and reiterated to the analysts last year. If Chevron attains its target, it will have increased production in the interim by 19%, a not inconsequential gain. Mr. Watson attributed the reduction in the company’s output target to lower spending for shale wells due to the fall in North American natural gas prices, higher volumes of oil going to the host countries where the company operates under production-sharing arrangements, and “project slippage.” Mr. Watson also indicated that the company would raise $10 billion from the sale of assets, up from its previous target of $7 billion. The company plans to sell oil and gas fields and acreage to raise the funds.
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Managing Director, PPHB LP